Franchising under pressure

He is telling franchisees to focus on what they can control – maximising sales from customers who walk in their doors. While franchisee sales hold up, so will Spence’s profitability.

FCA’s Wright says that despite reduced turnover, many franchisors are regarding the recession as an opportunity. He also argues there is a lot of incentive to try to maintain market position to be ready to take advantage when we come out of recession.

Bruce Myers, chief executive of franchised speciality meat retailer Lenards, says his 181-store chain is growing through an alliance with Metcash that will put 14 or 15 Lenards outlets in IGA supermarkets this year and add Lenards counters to butcher shops.

The retailer reported the average annual profit of a Lenards franchise rose 16% in the six months to 31 December 2008. Myers says the increase in profitability is due to increasing sales of high margin products, monitoring sales with a new technology package and sharing sales information among stores.

He says that a recession is an opportunity for Lenards to value-add to its chicken products, because people eat at home more, they have little time and they may not have the skills to cook. Myers expects revenue of $145 million to $150 million in 2008-09, up 2% to 3% on the previous year.

Strategies for maintaining profit in a recession

What can franchisors do to improve profitability without cutting services to franchisees, discounting and over-selling franchises to keep cash flowing?

• Franchisors should get a better understanding of business at ground level. This is particularly important for franchisors not operating stores themselves, because it can be easy to lose touch with the customer. Use the understanding to take out excess costs.
• Focus on gross profit margin, not just sales. Discounting can be a serious miscalculation.
• Review pricing strategies and include value-add offers. Avoid discounting as much as possible (unless it is used as a tool, see below). Focus on up-selling and cross-selling to existing customers.
• Manage cashflow by having sensible upfront discussions with creditors and debtors, and offer incentives, such as discounts, to pay faster and be paid faster.
• Review product and service fit for the current market and be prepared to innovate.
• Maximise marketing effectiveness by reviewing the message medium, frequency and cost against returns generated.
• Review your inventory management and logistics and supply chain, and look for savings.
• For retailers, review staffing levels in store to ensure that they fit well with peak customer demand. Cut staff only where absolutely necessary because they are expensive to replace when conditions improve.
• Review your own living costs and how much money is withdrawn from the business.

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Also see SmartCompany’s Franchising Hot Topics page.